Saving for a rainy day

If as they say, experience is a compelling teacher, somebody forgot to tell Nigeria’s leaders. But the International Monetary Fund and the Central Bank of Nigeria have been filling the gap recently, warning Nigeria and other wayward oil producers to save to avoid being caught flat-footed when commodity prices crash afresh. For Nigeria especially, the time to save and rebuild fiscal buffers is now.

The IMF warning that an economy pinning its hopes on the current bounce in global oil prices is precarious is the shot in the arm the Muhammadu Buhari government needs to move into action to diversify revenue sources and restructure the country’s dysfunctional economy.

But the need to save had also come from the CBN, whose Monetary Policy Committee rose from its regular meeting early in April to raise the alarm at the increasing sums being shared by the three tiers of government from a Federation Account boosted by increased oil revenues from recovering oil prices.

The Director of the IMF’s Research Department, Maurice Obstfeld, on the sidelines of the World Bank/IMF Spring Meetings in Washington, warned bluntly that the seeming present “good times” that have seen Nigeria grow its foreign reserves and have more money for the federal, states and local governments to spend than the previous two years, would not last. The respite from empty treasuries offered by higher commodity prices, he said, should be utilised to rebuild fiscal buffers, enact structural reforms and retool monetary policy. He urged policies that would extend the upward swing and reduce the disruptive unwinding.

The CBN was alarmed that with the oil price rebound and stability in the oil producing Niger Delta region, the three tiers were spending without saving, obviously failing to learn from the recession that mercifully lasted from the fourth quarter of 2015 to late last year, the effects of which are still with us. It said the increasing monetisation of oil proceeds in 2018 without “a robust savings programme to ward off future shocks from future falling oil prices is dangerous.”

The danger from such fiscal folly was evident when crashing oil prices triggered five successive quarters of Gross Domestic Product contraction, more factory closures and job losses, degradation of the naira in relation to other currencies, high inflation and drastic fall in government revenues. At a stage, about 27 states were unable to pay public sector workers and pensioners and a borrowing spree ensued and has persisted.

As this newspaper has consistently canvassed, only a prodigal fails to save and prepare for an inevitable cyclical downturn. Nigeria has enjoyed and suffered this vicious cycle at least three times: after the first oil boom of the mid-1970s, an oil crash ensued in the 1980s, followed by another boom accompanying the Gulf War of 1991, followed by another crash in the late 1990s; another boom from mid-2000s lasted till 2014 and another crash. A rebound from late 2017 lifted prices from a low per barrel price of $20 to hit $74 per barrel last week. With oil price benchmark in the 2017 and 2018 national budget fixed at $42.5 per barrel and 2.2 million barrels of crude production per day and $45 per barrel and 2.3 million crude production per day, the ECA should be rising.

The sharp fall in oil prices eventually provoked the country’s first recession in three decades: government revenues crashed, an exchange rate crisis has ensued and persisted, with the naira that exchanged officially at N167 to US$1 in mid-2014 falling to N502 to $1 in 2016. Foreign reserves fell from $41 billion in early 2014 to a low $23 billion in 2016.

The three tiers of government need to save to avoid the fate that befell them in the last recession. At least 23 states still cannot meet their monthly wage and pension bill obligations, according to the Nigeria Labour Congress, while the states and federal centre have amassed new external and domestic borrowings amounting to $70.99 billion by December 2017, up from $67.72 billion three years earlier.

But confronted like Nigeria with the same oil price shock, United Arab Emirates’ Abu Dhabi and Dubai had buffers like Sovereign Wealth Fund of $773 billion and $183 billion respectively, first rate infrastructure and a liberalised economy drawing combined Foreign Direct Investment of $8.9 billion in 2017, according to the Global Investment Report.

Recent moves by the National Assembly to legitimise the Excess Crude Account established under President Olusegun Obasanjo and serially abused by his successors, including the incumbent (Buhari), whose government surreptitiously withdrew $496 million from it in the name of fighting insurgency, bypassing parliamentary approval and agreement with 774 LGs that together with the 36 states and the centre, co-own the buffer. Yet, it was established to take in oil revenues accruing from higher prices above the budget benchmark and to be drawn only when prices and revenues fall short for three consecutive months. From $22 billion in 2007, only $1.8 billion is left in it.

The governments need to be more prudent; reality dictates that they drastically reduce the cost of governance and the bureaucracy and their luxurious lifestyle. Apart from legitimising the ECA, there should be urgent steps to liberalise the operating environment to attract investment in agriculture, mining, manufacturing, steel, downstream oil and gas, railways and petrochemicals.

Our governments should no longer exist only to pay salaries to less than five per cent of the population: there should be reforms in tax laws and a dogged, honest programme of targeted privatisation to attract the best global companies into key sectors of the economy. Conservative Saudi Arabia is opening to the media, entertainment, aviation and infrastructure and rebuilding its depleted SWF, while the world eagerly awaits the promised floatation of its Saudi Aramco, the world’s biggest oil company.

We can only ignore the IMF’s and CBN’s warning at our peril. Buhari should lead the way by prudence and responsible fiscal behaviour.

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